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RIK management, not concept, led to program’s demise

Bob Tippee
Editor

If the US government can’t manage oil and gas royalties taken in kind, how can anyone expect it to handle a shady market for greenhouse-gas emission credits?

Interior Sec. Ken Salazar plans to kill the federal royalty-in-kind (RIK) program. A leasing reform bill in the House would do the same thing.

That’s bad news for oil and gas producers, for whom the program offers a clear advantage: It precludes fights over valuation.

When the government takes its royalty in kind, few questions can arise over sticky issues such as valuation points and price proxies.

With RIK, the government receives its share of production and either sells or stores it. What can be simpler?

With government, nothing’s simple. Since its evolution from pilot programs in the late 1990s, the modern RIK program has never worked without doubts about management.

In 1996, Johnnie Burton, then director of the Minerals Management Service, requested an internal investigation of the RIK program, which MMS administers.

Results weren’t cheery. The investigation uncovered weak controls and misbehavior by MMS employees. MMS’s reputation suffered.

Now a Government Accountability Office study says MMS may be collecting too little royalty because of accounting lapses.

That the RIK program has problems is clear. But legitimacy of the concept isn’t one of them.

The decision to scrap the whole program is, therefore, regrettable. It will replace administrative problems at MMS with valuation disputes, which inevitably arise between leaseholders and royalty owners. When the royalty owner is the US government, those disputes become political.

Oil and gas producers shouldn’t welcome the change.

The decision, moreover, implies not only that the RIK program is broken but also that it can’t be fixed. It says the government can’t manage it.

Yet Congress soon might place a comparable mechanism in charge of a nebulous market for emissions credits. Instead of physical quantities of oil and gas at known locations, transactions under the proposed cap-and-trade system would involve rights to emit greenhouse gas worldwide. Values would depend largely on government decisions.

Against the politically charged complexity of that program, RIK administration would look like managerial child’s play.

(Online Sept. 18, 2009; author’s e-mail: bobt@ogjonline.com)


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